Funding Favours Experience: Here’s How First-Time Founders Can Compete

Founder risk is always a big concern for VCs during the early investment stages. Serial entrepreneurs are therefore viewed more favourably than first-time founders.

As a result, founders who have successfully exited at least one business and have subsequently launched another are more likely to receive institutional capital at pre-Seed, Seed and Series A compared to their first-time founder counterparts.

With deal count dropping to its lowest level since 2018, investors are becoming ever more risk averse. This puts first-time founders at an even greater disadvantage. Recent research suggests that this gap is widening.

As the competition for capital intensifies, what can first-time founders learn from the behaviours of serial founders that will help them close this gap?

Quantitative insights

Research by Pitchbook has shown that serial entrepreneurs outpace their unproven counterparts in nearly all aspects of startup funding. They raise more money with less time between rounds, receive higher valuations and command larger valuation step-ups. And these gaps don’t close later in the venture lifecycle - they widen.

The key takeaways from this research are:

• Timing: Startups backed by serial entrepreneurs were able to raise a first VC round of capital around 12 months earlier (at the median) than first-time entrepreneurs. This gap has been widening over the past 2 years: Whilst the median timeline for serial founders has remained static it has increased markedly (by almost 2 months) for first timers.
  
  
• Deal Sizes. Median Angel & Seed deal sizes for serial entrepreneurs were 2.5x larger than first-timer deals, while early and late-stage rounds led by serial entrepreneurs were roughly 3.4x larger.
  "The larger divergence in median deal sizes between serial and novice entrepreneurs in the early and late stages suggests that even market-proven products and demonstrated revenue growth cannot overcome the inherent investor confidence afforded to serial entrepreneurs."
  
  
• Valuations. Seed-stage serial entrepreneur-led startups achieve median valuations that were 1.9x higher than those of their first-time counterparts. These variances further increased to 2.5x at the early stage and 3.7x at the late stage.
  
  
• Investors. Across all venture stages, serial entrepreneur-led startups capture roughly 2.5x more participation from the top 100 investors than their first-time peers. At the seed stage, 25% of serial entrepreneur-led startups received investment from a high-profile investor. In the late stage, this increases to 40%.
  
  
• Cost of scaling. At the earliest stages of VC, serial entrepreneurs are happy to give up a greater percentage of their company - nearly 6% more than their first-time counterparts.
  "The trade-off of receiving more capital at an early stage for a larger investor equity stake allows serial entrepreneurs to more rapidly scale their businesses and reach their next milestone, but it comes with a price in terms of the entrepreneur’s dilution."

2 big factors at play

These insights suggest that the earlier the stage of the startup the more weight an investor will attach to the risk profile of the founding team. In other words, the more startup experience they have, the lower the perceived risk and the higher their chances of funding success. This then creates a virtuous circle:

• This is most noticeable in the median number of years since founding at the time of a startup’s first VC round. The faster this can be achieved, the more the startup's growth curve can steepen, thereby allowing it to overtake competitors and generate (more) investor interest.
  
  
• With earlier funding these businesses mature more quickly. They display stronger financial performance earlier than others in their entrepreneurial cohort, thus leading to an even greater disparity in median deal sizes.
  
  
• And on dilution, the cost of this gradually diminishes: At the earliest stages of VC, serial entrepreneurs are giving up a greater percentage of their company than their novice counterparts - despite much greater valuations being attained. But this trend then reverses course in the late stage, suggesting that momentum from prior fundraising rounds allows serial entrepreneurs to give up less equity later on.
  

Whilst the perception of lower risk by investors is clearly a factor in favouring serial entrepreneurs, there is another equally valid reason why these founders may be driving better funding outcomes - they simply understand the 'system' better. In other words, they are more in tune with the funding market:

• They know who the key players are and what they are looking for
  
• They better understand the funding process and how to drive up value
  
• They have become more experienced in the art of 'investor persuasion'

In short, they have adapted their approach to align with investor needs, not just customer needs.

By building on these more qualitative insights, we can show how first-time founders might be able to close the gap on their more experienced counterparts.

Qualitative insights

A fascinating aspect of our work at Duet is the opportunity to observe founder behaviour. One of our recent studies compared the ‘state of investment readiness’ of first-time founders to serial founders, as they prepared their startups for funding rounds.

Perhaps unsurprisingly, given their additional experience, serial founders consistently scored higher. But the real insights came from discovering WHY they scored more highly. We were able to draw upon our rich client dataset, having advised over 60 founders during the past 15 years, across a range of funding stages from pre-Seed to Series B.

Almost two thirds of this portfolio have been first-time founders, the balance being made up of serial founders with one or more startups already behind them. For the study, we used a particular database of findings from one of our core services, 'Investment Analysis'. This is an investment preparation project that examines, amongst other things, the calibre of the investment proposition.

Investment Scorecard

The main output of the analysis is a scorecard, very similar to what VC funds use in Investment Committee meetings when making their final investment decision. Here we grade 12 critical elements of the investment proposition. This was the first time we had undertaken a comparative analysis of these historic scorecard results.

In our study, serial founders consistently delivered higher ranking scorecards during Investment Analysis. i.e., their startups were in a more advanced state of readiness for each funding round.

We were keen to discover if serial founders possessed common attributes that gave them this edge. If so, could this potentially help first-time founders looking for a leg-up as they navigate the same journey?

By undertaking a qualitative review of dozens of Investment Analysis scorecards, we discovered 3 areas where serial founders seem to most effectively leverage their experience throughout each fundraising cycle:

1. Clear Vision

The first was 'CLEAR VISION'. Serial founders not only have strong sense of mission, but they possess a strong vision of the economic outcome they are seeking, both for the company and themselves personally. For example, they often have a figure in their head for what economic success will look like. First-time founders rarely have this degree of economic focus.

To be clear this is NOT to say that serial founders are solely driven by economic outcomes, just that they are far more conscious of VC fund economics - and the specifics of how VCs make money. They know this is what investors will care most deeply about and they adapt their proposition accordingly.

Key tactic: They take calculated risks, faster. Optimising for rapid market feedback and information acquisition is key to validating the vision. They want to prove their problem/solution thesis and begin the journey to product/market fit as fast as possible. They don't delay by getting too heavily stuck in analysis. They build evidence quickly. They maintain a constant sense of urgency and are equally impatient for either success or failure. They want to know if they are onto an economic winner sooner rather than later. Time is their most precious resource. This drives them to their first institutional round faster.

2. Value Creation

The second area of leverage was 'VALUE CREATION'. Serial founders focus relentlessly on how the business model will maximise enterprise value creation, not just how it will delight customers.

They operate with a much clearer mental roadmap of the major milestones that will get them into growth mode. They align these milestones with the key funding steps to create irresistible funding propositions at intervals along the way. They understand how the value chain of capital works.

Key tactic: They derisk future rounds by adopting a milestone-based approach. This demonstrates to incoming investors that the use of funds will be focused on reaching the next funding milestone. In so doing they create a business whose major funding rounds will consistently attract new lead investors with bigger ticket sizes and larger valuation uplifts.

3. Investor Mindset

Serial founders demonstrate a deeper understanding of how investors make investment decisions. They are also more cognisant of how these relationships play out over time, especially when things don't go according to plan.

Key tactic: They build a support network that provides investor intelligence and introductions. They surround themselves with advisors that can bring specialist knowledge and insight. This can be in the form of non-exec board members, advisory board members, professional advisors like Duet, and a wider, more informal network of other like-minded founders happy to pool their knowledge.

In summary

We can see from the quantitative analysis that serial entrepreneurs are clearly favoured by investors. Experience brings with it the perception of lower risk.

But this experience also means that these founders know the system better, are more in tune with the market, and know what it takes to persuade investors at each funding milestone. They have adapted their approach to align with investor needs.

This enables serial entrepreneurs to speed up the entire funding process and close bigger deals at higher valuations. In other words, they use their experience to buy time. They leverage this time to focus on their primary mission: growing enterprise value.

We can see from the qualitative insights that whilst these behaviours are not guarantees of success, they can - at least in part - be adopted by first-time founders to help close the gap.

By moving faster, taking a milestone-based approach, and leveraging a strong support network, first-timers will demonstrate to investors that they are learning quickly and operating way past their years.

In Darwin’s famous words, it is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.

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